I suddenly realised what has been going on all this time. They have been smoking some doobies – some real strong doobies and their heads are not what they used to be. How cool is that conclusion? It explains everything – why they typically miss the point of everything; why they say really dumb things most of the time; why they usually look half asleep; why they think down is up or up is down; why they continually think that what is good for them is bad for them and vice versa and all of that funk. I am so relaxed now – I actually thought there was a problem. But a bit of weed is doing it. I guess it is time for them to ease up on their intake though or their lack of concentration and awareness of reality will become entrenched. We need all the citizens we have thinking clearly and working together.
In relation to the rally in Washington, staged by the Daily Show’s Jon Stewart and Stephen Colbert, it was reported in the Sydney Morning Herald that “fiery conservative commentator Rush Limbaugh mocked the Saturday event” saying that:
… it will give the tea party and other conservatives a chance to build voter turnout for Tuesday while Democrats go to Washington to “smoke some doobies” and listen to a “couple of half-baked comedians”.
He got it wrong though. I think he meant the deficit terrorists who attended Glen Beck’s (smaller function recently) were on the weed. The funniest thing I heard about Rush Limbaugh who raves about family values as part of his conservative agenda was “that he knows plenty about family values – given he has had so many”. Maybe he is smoking the doobies.
Maybe suggesting that the mainstream macroeconomists are smoked out dope-fiends is being too tough on them. Maybe they are just dumb. Joseph Stiglitz hints at that diagnosis.
On October 20, 2100, Joseph Stiglitz gave an interesting interview – Nobel Laureate Joseph Stiglitz: Foreclosure Moratorium, Government Stimulus Needed to Revive US Economy – where he speculated on the skills possessed by those advocating austerity.
In that interview, which offered interesting ideas about the foreclosure problems now emerging, Stiglitz was asked whether deficits mattered. Here is the exchange:
AMY GOODMAN: Joe Stiglitz, the deficit, the battle cry of the Tea Party movement, of the Republicans, as well. Robert Rubin has weighed in, says any new stimulus plan is highly likely to be counterproductive. What do you think has to happen? Does the deficit matter? And how do you think it should be dealt with?
JOSEPH STIGLITZ: My view is we cannot afford not to stimulate the economy. So, you know, anybody that says we should go back to austerity or we should not have a second-round stimulus just doesn’t understand economics. And let me be very clear about this. If we don’t stimulate the economy, the economy is going to get weaker. When the economy gets weaker, tax revenues go down and expenditures go up. Already, more than 40 million Americans are on food stamps. Number of people on Medicaid is reaching record levels. So, revenues go down, expenditures go up, deficits get worse. If you stimulate the economy, then people get jobs, they spend money, tax revenues go up. Now, if we spend the money on investments—investments in education, technology, infrastructure—you grow the economy in the short run from the stimulus, you grow the economy in the long term because of the returns that you get on these investments.
It is like the ABC is to a little kid – one things follows another. All the smokescreens that have been put up by the mainstream conservatives never resonate like these basics:
1. The budget deficit is largely endogenous – that is, is driven largely by private spending decisions which impact on the budget outcome via the automatic stabilisers (changes in tax revenue and payments linked to economic activity levels).
2. Spending – both private and public – together creates aggregate demand which firms react to by increasing output and hiring people if there is idle capacity/resources.
3. Firms will not increase output and employment if they do not think they can sell the extra output. They form expectations of what they can sell by the direction of aggregate demand.
4. Cutting public spending (net) when private spending is not capable of taking up the slack will damage output and employment growth because it sends a signal to firms that there is not going to be growth in sales.
5. When output and employment growth stall, tax revenue falls and welfare payments rise quite apart from anything else the government might do. The budget deficit rises but with nothing good to show for it (like higher economic activity and employment levels).
6. When there are huge pools of idle capacity (machinery, office equipment etc and labour), then even if private spending is growing you still need further fiscal stimulus.
7. Households and firms are not Ricardian in the sense that they think ahead and calculate that every dollar of public net spending is a dollar they have to save so they can pay the budget deficits back later. No empirical evidence supports that crack-pot (doobie-driven) theory. It only gained credence because by then my profession was so lost in the smoke haze (and hatred of anything public) that anything that helped them make the case got a jersey!
8. If you want private firms to reduce their debt overall (that is, save overall) and if you also want the government to run a budget surplus then you better show how you will get an external (net exports) surplus big enough to “fund” both surpluses. Normally, that will not be case and the only way you can ensure the private sector can save overall is to run a budget deficit.
All of this is basic macroeconomics. So if you are inclined to advocate austerity right now rather than support further fiscal stimulus given the current state of national accounts (spending and output aggregates) the you:
just don’t understand basic economics.
… or you have been smoking the doobies too much! Simple as that. So either you are smoked out or dumb! Take your pick. The first used to be cooler but I doubt whether it is these days. Both explanations lead to the same end – stupidity!
As an aside, in the interview, Stiglitz then offered an analogy between the government borrowing (at low rates) and a private firm in the same position saying that if you had profitable investment opportunities “you would be irresponsible, you would be foolish, not to undertake those investments”.
At that point I would say the Nobel Prize winner is struggling with an understanding of the what opportunities a fiat currency presents. He chooses to perpetuate the false analogy between the government’s budget decisions and those pertaining to a private firm. There is no analogy. The bond yields paid by the government are irrelevant when it comes to determining whether some net spending will deliver net social benefits.
The costs to the government are the real resources used in the program not the $s that are created and spent. The private firm however has to bear in mind the cost of its financing as part of the private profit calculus it uses to determine whether a project is worthy of investment. The national government does not have to do this because it is not revenue-constrained – it issues the currency.
The hoopla by which it “borrows” and spends is just an ideological ploy in the fiat currency era. In the convertible currency systems the government had to finance its net spending but now it “borrows” unnecessarily.
Please read my blogs – Gold standard and fixed exchange rates – myths that still prevail and On voluntary constraints that undermine public purpose – for more discussion on this point.
All of this resonated with me when the US Bureau of Economic Analysis released the third-quarter National Account preview on October , 2010. The bottom line is that the US economy is not growing fast enough to make any inroads into the unemployment situation and is being saved from a worsening unemployment crisis by very low or zero labour force growth.
Which means that the unemployment crisis is being attenuated or masked by a hidden unemployment crisis (given participation rates have been falling in recent months).
I will come back to the BEA release soon. But this article caught my eye in the New York Times (October 27, 2010) – Tax Shortfalls Spur New Fear on Europe’s Recovery Bid.
You should read this in the context of the latest Eurostat data released on October 28, 2010 which showed that:
The euro area (EA16) seasonally-adjusted unemployment rate was 10.1% in September 2010, compared with 10.0% in August4. It was 9.8% in September 2009 … Among the Member States, the lowest unemployment rates were recorded in the Netherlands (4.4%) and Austria (4.5%) and the highest in Spain (20.8%), Latvia (19.4% in the second quarter of 2010), Estonia (18.6% in the second quarter of 2010) and Lithuania (18.2% in the second quarter of 2010). Compared with a year ago, the unemployment rate fell in seven Member States, remained stable in one and increased in nineteen.
Unemployment rates in the euro area have been consistently rising since early 2008. The monetary system has failed. It is only being propped up courtesy of the “fiscal interventions” of the ECB in contradiction to the Lisbon Treaty rules. They should scrap the system and reintroduce national currencies and/or create a single fiscal authority and allow it to pick up the demand slack.
You might like to see this NYT multimedia coverage of the The Austerity Zone: Life in the New Europe and related article – In Europe, a Mood of Austerity and Anxiety. They fail to trace the source of the problem to the basic design flaw in the monetary system underpinning the Euro and the ideologically-motivated recalcitrance of the Euro bosses.
Anyway, the aforementioned NYT artcle – Tax Shortfalls Spur New Fear on Europe’s Recovery Bid – notes that the “mathematics of austerity are getting harder” and argues that:
With economic conditions weaker than expected, tax revenue is coming up short of projections in parts of Europe. As a result, countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year by impatient bond investors.
To which one might say Duh!
The article notes that Greece is now likely to miss its target which was agreed as a part of its IMF intervention and that this “has spurred investor fears that the Greek government will be unable to close the gap and that Greece may ultimately be forced to restructure its mountain of debt with foreign investors.”
Investors are either smoking too many doobies or dumb if they ever thought otherwise. It is basic macroeconomics. We have to get used to that and construct our policy decisions accordingly.
It is sheer stupidity to invent a non-existent world (with Ricardians running everywhere) and then get surprised when your policy changes make the real world worse.
The article says that:
But it does highlight just how difficult it is for stagnating economies with rising unemployment rates to make fiscal adjustments exceeding 10 percent of their economic output in just a couple of years.
It is not difficult – it is virtually impossible. It was never a good bet – my understanding of basic macroeconomics told me that these countries were always going to encounter rising deficits.
There is simply no case for fiscal austerity in these nations. Some sector has to spend for there to be growth. With the non-government sector not meeting the challenge there is only one other show left in town. It is just basic macroeconomics – there are two sectors – government and non-government.
Now we can talk a bit about the latest National Income and Product Accounts, 3rd quarter 2010 (advance estimate) published by the US Bureau of Economic Analysis (October 29, 2010). You can also study the full publication release if you are interested in more detail.
The latest data shows that:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2010 … In the second quarter, real GDP increased 1.7 percent … The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures … private inventory investment, nonresidential fixed investment, federal government spending, and exports that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Closer scrutiny shows that while consumer spending is increasing it still remains fairly modest. The results also show that construction has falling back severely and investment in equipment and software is slowing. The data suggests that the early spurt in growth (early in 2010) stimulated some capital replacement (hence the realtively strong growth in investment in equipment in the second quarter) but that the rebuilding is over for now.
The data also shows that a major contributor to economic growth remans the fiscal stimulus spending from the federal government (it rose by 8.8 per cent in the September quarter).
There is no growth coming from the external sector as American continue to enjoy real terms of trade that deliver them benefits from imports outstripping exports.
Some commentators think the answer is to shift consumption away from imports to domestically produced goods but in a market system how are you going to achieve that?
In addition to the continued support from federal spending growth, US real output growth was heavily dependent on firms rebuilding their inventories which means that once they are replenished to levels considered normal output growth from this source will die again. The problem is rather dire.
The BEA says:
Real final sales of domestic product — GDP less change in private inventories — increased 0.6 percent in the third quarter, compared with an increase of 0.9 percent in the second.
So the 2.0 per cent headline figure looks very wan indeed when you subtract out the inventory cycle effect.
Should anyone be happy about these results? I wouldn’t be if I was a US citizen. When economic growth is insufficient to stop unemployment from rising you have a severe problem, especially when the growth in the labour force is around zero and has been consistently negative in recent quarters.
The following graph uses US Labour Force data available from the US Bureau of Labor Statistics and shows the evolution of labour force and employment growth and the broad labour underutilisation measure (green line) since September 2005.
This is a picture of a major collapse in employment growth which then induced a further reduction in labour force growth as unemployed workers (and new entrants) gave up looking – the so-called discouraged workers. The rise in unemployment would have been much worse had these workers remained in the labour force and kept looking for the non-existent jobs.
At present, annual employment growth is now close to zero (0.45 per cent in September 2010) and is just matching the labour force growth which is a sluggish 0.15 per cent (virtually static). This is an appalling state of affairs and shows how much fiscal intervention will be required.
I thought the comparisons provided by Dean Baker in his UK Guardian article (October 29, 2010) – Why growth still feels like recession were interesting. He said:
It may not be immediately obvious quite how weakly the economy is growing. First, we need a reference point. When an economy gets out of a step recession, it should be soaring, not just scraping into positive territory. In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession.
And now the current growth is falling below that average and the main drivers of growth at present are in retreat.
There has to be another fiscal stimulus or else unemployment will continue to creep up and persist at the outrageously wasteful levels for years to come. The US is now going to experience long-term unemployment of the dimensions that Europe has endured for decades courteously of their irresponsible fiscal strategies (the strait-jackets imposed on them by the Maastricht rules).
Even though the fiscal rules categorically failed to work when it came to the crunch because of the strength of the automatic stabilisers in the face of the major private spending collapse the Maastricht treaty imposed a mentality that led to a suppression of aggregate demand over the last two decades. It also led to a host of supply-side policies (under the aegis of the OECD Jobs Study) being imposed which just worsened the problem. I cover this policy folly in detail in my 2008 book with Joan Muysken – Full Employment abandoned.
Stiglitz in the interview mentioned above was asked how much fiscal stimulus was needed at present and he replied:
Well, I think we really need $400, $500 billion a year. Part of the reason why we should try to keep those kinds of numbers in mind is to realize that we have a federal system, about a third of all spending is at the state and local level, and the states have balanced budget frameworks, which mean when the revenues go down, they have to cut back spending or raise taxes, which is very difficult in the current environment. And their revenues are going down. They depend very heavily on property taxes. Values of real estate have gone down 30, 40 percent, in some places 50 percent. And the result of this is that we’re laying off teachers. We’re laying off basic—those who provide basic services. So, while the government is coming to the end—the federal government is coming to the end of the stimulus, the states are retracting. We saw that in the September numbers on jobs. Sixty-seven thousand private-sector jobs were created—not enough for the new entrants in the labor force, less than half the amount we needed. But we lost, in total, 95,000 jobs …
I would suggest that is a conservative estimate of the required fiscal support that is needed just to keep things as they are.
While a major fiscal stimulus is needed, the politicians in the US are (as they butt their roaches or wonder which day it is) debating how large the cuts in social security payments (which feed almost $-for-$ into the spending stream) should be. With spending growth not robust enough to even create enough jobs for those who want them this is crazy stuff.
The stuff that emerges from a smoke haze.
Basic macroeconomics again – increase spending and employment will grow as long as the spending is targetted at creating jobs and not going into the bottom line of some corporation which little intention of spreading the largesse.
The sad news is that the only real policy response being broached is a renewed round of quantitative easing from the central bank. That will do virtually nothing to help the situation.
All it shows is that the government can produce liquidity without issuing debt. It would be far better spending to create jobs without issuing debt.
The bottom line is that (Source):
The fiscal stimulus is waning, the boost from inventories is fading, pent up investment demand is slowing …
You can get an idea of what advice the US government is getting with respect to dealing with this on-going crisis by examining the reports and input from the US Congressional Budget Office.
On February 23, 2010, the CBO Director made a Statement to the Joint Economic Committee, US Congress outlining Policies for Increasing Economic Growth and Employment in the Short Term.
If you read the statement and related research in detail you will see how biased these options are towards private market solutions and holding patterns.
The following Table is taken from that testimony (CBO Figure 1) and shows the policies considered and the estimated temporal impact. While some of these policies might be beneficial they all avoid the elephant in the room. Which is? Answer: the government can actually employ people directly – permanently – without much delay – and get those wages flowing into the spending stream.
They could get the greatest employment dividend by offering a Job Guarantee immediately. They will not because they are ideologically entrenched in their neo-liberal bunker. So the range of policy options being considered are heavily constrained by that way of thinking.
I know my friend Warren Mosler advocates a cut in the payroll tax and in the US setting that will help stimulate consumption. I have no problem with that but a much stronger employment response – albeit driven by the public sector – would be to make an unconditional job offer at a decent minimum wage to anyone who wanted them. The lessons from the work programs in the FDR period are still redolent – although in the smoke haze – only the clear-minded can see them.
To see why the GDP growth is insufficient in the US we can invoke Okun’s Law – arithmetic derived from aggregate macroeconomic relationships. This rule of thumb was named after the doyen of applied economics, US economist, the late Arthur Okun.
Accordingly, there is a link between the real GDP growth, labour productivity growth, and labour-force growth that feeds into movements in the unemployment rate. Thus, if GDP growth (increasing demand for labour) is greater than the sum of labour productivity (reducing labour requirements) and labour-force growth (with participation rates constant), the unemployment rate falls. However, if the sum of labour-force growth and labour productivity growth outstrips GDP growth, then the unemployment rate rises.
The Okun framework allows us to make predictions about changes in the unemployment rate given the rate of growth of GDP. Simply stated, labour productivity growth reduces the amount of labour required for each unit of output, while labour-force growth increases the number of jobs that have to be created if unemployment is to remain unchanged. So both growth rates place upward pressure on the unemployment rate.
If GDP growth is strong enough, the economy can absorb the labour supply and labour productivity growth. For the unemployment rate to be constant, real GDP growth has to equal the sum of labour-force growth and labour productivity growth. We can call this the required rate of GDP growth. Any better will lead to a falling unemployment rate, while any deficiencies in the required rate will see the unemployment rate rising.
The US Bureau of Labor Statistics data (from graph above) shows that labour force growth in the last 12 months has been very low (-0.43 per cent). For the period since September 2005 it has averaged 0.69 per cent and for the growth period September 2005-07 it averaged a more normal 1.36 per cent per annum.
If the US economy grows more robustly then the labour force will start expanding towards that higher figure. The Table just simulates the three rates of growth mentioned for interest.
The US Bureau of Labor Statistics publishes productivity estimates for the US economy. The following table snippet is taken from their Table A September 2010 release.
So labour productivity is growing quite quickly. So what if annual growth in labour productivity continues at 3 per cent?
The following Table gives the rough rule of thumb for the likely direction in the US unemployment rate derived from Okun’s arithmetic. You can see that the required real GDP growth for a zero change in unemployment rate is the sum of the labour force and productivity growth rates. So it gets higher the higher is the labour force growth. As the economy expands, the hidden unemployed start coming back into the labour force and it makes it that much harder to put a dent in the unemployment pool.
With the actual real GDP growth rate of 2 per cent, the final column estimates what will happen over the next 12 months if these aggregates are maintained. You can see that unemployment rises regardless but the rise is suppressed by the pitifully negative labour force growth rate. That will not persist as GDP growth remains positive (albeit low).
The middle row assumption is more realistic (labour force growth of 0.69 per cent) which means that at the current real GDP growth rate the unemployment rate will rise above 10 per cent again over the next 12 months.
Baker (in his UK Guardian piece) agrees and says:
Just to add enough jobs to keep the unemployment rate constant, the economy has to grow at a 2.5% rate. In the absence of some unexpected change in policy, we will not see the economy growing at this pace any time soon, which means that the unemployment rate will be rising. We can expect it to cross 10% in the not-distant future and likely to remain in double-digit levels through most of 2010.
He says that the “outrageous part of this story is that the pain is completely preventable. We know how to create jobs. It is really simple; we just have to spend money – people work for it. Unfortunately, the fiscal scolds, the people who were too lost to see the largest financial bubble in the history of the world, are telling us that we have to cut our deficits and tighten out belts.”
With the mid-term elections tomorrow in the US and all the debate pointing in exactly the opposite direction I would be bunkering down if I was an employed American and saving like hell. The trouble with that reasonable private response is that it will worsen things.
The US is really caught in a smoke haze or the ignorance of their policy makers aided and abetted by those who have benefitted from the fiscal stimulus to date and don’t want anyone else to get a share.
Digression: Still searching for our bursting economy
In my search for the alleged bursting at the seams Australian economy – that is, what the bank economists are always telling us – I eagerly consulted the latest ABS House Price Indexes: Eight Capital Cities data for September 2010, which was released today.
If inflation is about to explode and labour market costs are subdued then perhaps it is going to come from a housing bubble.
Answer: no bubble. The data shows that capital city house prices are virtually unchanged over the September quarter. Flat = flat!
A basic understanding of macroeconomics tells us that further fiscal stimulus is required in the US. The same can be said for the UK and they are providing us all with the 1937-laboratory. To think that fiscal austerity will save the say is to misunderstand the basics of macroeconomics. Only a fool or a dope-crazed head would advocate such demolition in this day under these circumstances.
That is enough for today!